Heard Off the Street: Broker's record in need of repairs

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One of the first things investors are urged to do before handing over their money is to investigate the track record of the person they are turning it over to.

But that record could be missing some vital information, according to a study conducted by a group of lawyers who represent wronged investors.

The Public Investors Arbitration Bar Association said information about stockbrokers who were the subject of investor complaints had been erased -- or, in legalese, expunged -- from about 90 percent of the cases that either were settled or involved awards being granted to investors.

"Investors who are diligent enough to seek out information about brokers may be getting a woefully incomplete picture of the individual to whom they will entrust all or most of their nest egg," said Tampa, Fla., attorney Scott Ilgenfritz, president of the bar association.

The study found that one broker submitted 40 requests to have records of complaints expunged and got his wish in 35 of the cases.

The records are kept by the Financial Industry Regulatory Authority, or FINRA. The Wall Street-funded group regulates about 630,000 brokers and is subject to oversight by the Securities and Exchange Commission. According to its website (www.finra.org), FINRA extracted $102 million in fines and restitution from fraudulent brokers last year.

Investors can access broker records by navigating to the BrokerCheck page on FINRA's website. They will find information on about 1.3 million current and former brokers, and 17,400 current and former brokerage firms.

The lawyers group and a consumer advocate say BrokerCheck too often provides less than a complete picture.

Investors "may be led to believe that a broker has a clean disciplinary record when that is far from true," said Rachel Weintraub, senior counsel of the Consumer Federation of America.

FINRA and the SEC have stated that expunging records is an "extraordinary remedy" that is only appropriate if an investor's claim is made against the wrong person, is false, or if the broker was not involved in the incident. FINRA recently issued guidelines emphasizing those points.

But Mr. Ilgenfritz maintained wiping the slate clean is all too common and that the arbitrators who consider expungement requests routinely grant them after hearing only the broker's side of the story.

"The current expungement procedures are seriously flawed," he said.

The group's findings mirror a study by Baruch College law professor Seth Lipner. He found that expungements occurred in about 94 percent of the cases he looked at involving investors who were paid to settle a claim.

Investor complaints are submitted to arbitrators because of a 1987 U.S. Supreme Court ruling that upheld the validity of brokerage firm contracts that required investors who believe they have been wronged to seek redress from arbitrators rather than the courts. The process is regulated by FINRA.

According to Mr. Ilgenfritz, about 80 percent of the cases filed with FINRA are resolved by settlements. Those agreements frequently require investors to agree to expungement -- or promise not to oppose a broker's request for it -- in exchange for recovering some of their money. Mr. Ilgenfritz said he has agreed to those terms in the past because it has been in his client's best interests.

"It's not the investor's obligation to preserve the integrity of the information in the system," he said.

Michael Betts, a Pittsburgh attorney who represents investors, said the settlements "are a significant factor leading to the expungement rate."

He pointed out that BrokerCheck relies on brokerage firms submitting accurate information, something that does not always happen. Mr. Betts said he is involved in a case where a firm reported that a case that was still open had been closed. The firm also significantly understated the nature of the investor's claims, he said.

Vicki Kuftic Horne, a Fox Chapel attorney who has represented investors as well as brokers, said a lawyer's first responsibility is serving the client and settlements are one way of doing that. She also said BrokerCheck is susceptible to misinformation submitted by firms.

FINRA said the bar association's study "underlines and emphasizes serious concerns FINRA shares" about the expungement process. However, it said expungements approved by arbitrators accounted for less than 5 percent of the 17,635 customer disputes filed from 2007 through 2011, the same period the bar association's study covered.

There are other sources besides BrokerCheck that investors can use to investigate a potential broker's record.

Maryland Securities Commissioner Melanie Lubin suggested getting in contact with state regulators. Sometimes complaints that do not have to be reported to BrokerCheck have to be reported to state regulators, she said. Ms. Lubin said investors interviewing potential brokers should ask them if they have had information on BrokerCheck expunged.